IFMP Fixed Income Securities Certification (FISC), Pakistan flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Bond price-yield relationship

Bond prices and yields are inversely related: when market yields rise, the present value of fixed future cash flows falls, so the bond price declines; when yields fall, prices rise.

Yield to maturity

The single discount rate that equates a bond's future coupon and principal cash flows to its current market price, assuming coupons are reinvested at that same rate to maturity.

Clean versus dirty price

The clean price is the quoted price excluding accrued interest; the dirty or full price adds accrued interest and is the actual amount the buyer pays the seller at settlement.

Accrued interest

Interest earned by the seller since the last coupon date, calculated as the coupon rate times days elapsed divided by days in the coupon period, and paid by the buyer at settlement.

Current yield

Annual coupon payment divided by the bond's clean market price. It measures only income return and ignores capital gains, losses, and reinvestment, so it differs from yield to maturity.

Zero-coupon bond

A bond issued at a discount to face value that pays no periodic coupons. The investor's return comes entirely from the difference between purchase price and redemption value.

Macaulay duration

The present-value-weighted average time in years until a bond's cash flows are received. It is a measure of interest-rate sensitivity and reinvestment horizon.

Modified duration

Macaulay duration divided by one plus the periodic yield. It estimates the percentage change in bond price for a one percentage point change in yield.

Convexity

A second-order measure of how a bond's duration changes as yields change. Positive convexity means price gains from yield falls exceed losses from equal yield rises.

Coupon rate

The fixed annual interest stated on the bond, expressed as a percentage of face value and usually paid semi-annually in Pakistan's PIB market, independent of market price.

Face value

The principal amount the issuer repays at maturity and on which coupon payments are calculated. It may differ from the market price at which the bond trades.

Discount versus premium bond

A bond trades at a discount when its coupon is below the market yield, at a premium when its coupon exceeds the market yield, and at par when the two are equal.

Treasury bill discount yield

A money-market quoting convention where the return is expressed as a discount from face value, calculated as (face minus price) divided by face, annualised on a 360-day basis.

Pakistan Investment Bonds

Long-term PKR government securities issued by the State Bank of Pakistan with semi-annual coupons and maturities typically of three, five, ten, and longer years.

Bond indenture

The legal contract between issuer and bondholders specifying coupon, maturity, redemption terms, covenants, and events of default that govern the issue.

Call provision

A right allowing the issuer to redeem a bond before maturity, usually when interest rates fall. It caps investor upside and raises required yield.

Credit spread

The yield difference between a corporate or sovereign bond and a comparable-maturity government benchmark, compensating investors for default and liquidity risk.

Credit rating

An assessment by a rating agency of an issuer's ability and willingness to meet debt obligations, typically graded from AAA investment grade down to default categories.

Reinvestment risk

The risk that coupons received during the bond's life must be reinvested at lower rates than the original yield, reducing the realised return below yield to maturity.

Interest rate risk

The risk that a rise in market yields reduces the market value of a fixed-rate bond. It is greater for longer maturities and lower coupons.

Liquidity risk

The risk that a bond cannot be sold quickly at a fair price because trading volumes are thin or bid-ask spreads are wide, forcing a discount on sale.

Default risk

The risk that an issuer fails to pay coupon interest or principal on schedule, potentially triggering restructuring or bankruptcy proceedings for bondholders.

Inflation risk

The risk that rising prices erode the real purchasing power of fixed nominal coupon and principal payments, reducing the investor's real return.

Term structure of interest rates

The relationship between yield and maturity for similar bonds at a point in time, typically upward sloping, and depicted as the yield curve.

Yield curve inversion

A downward-sloping yield curve where short-term yields exceed long-term yields, often interpreted as a signal of expected monetary tightening or economic slowdown.

Expectations theory

A term-structure theory holding that long-term yields equal the average of expected future short-term rates, so forward rates reflect market expectations.

Liquidity preference theory

A term-structure theory holding that investors demand a premium for holding longer maturities, so forward rates exceed expected future short rates.

Bond duration gap

The difference between the duration of assets and liabilities, used to assess interest-rate risk exposure; a zero gap implies immunisation against small yield changes.

Immunisation

A strategy matching the duration of a bond portfolio to the investment horizon so that interest-rate changes do not affect the value available at that horizon.

Repo transaction

A sale of securities with an agreement to repurchase them at a set date and price, used for short-term funding and closely tied to central bank liquidity operations.

Bid-ask spread

The difference between the price at which dealers buy (bid) and sell (ask) a bond, representing transaction cost and reflecting market liquidity.

Settlement date

The date on which a bond trade is finalised, securities delivered, and payment made; accrued interest is computed up to this date for the buyer.